New citizens to Baltimore must be aware that Baltimore does not educate on all the public policy issues---it allows politicians to say what they want----and this is one of the biggest issues for city homeowners.
WHAT YOU DID NOT KNOW THAT-------THAT MEANS BALTIMORE'S MEDIA HAS DONE ITS JOB IN KEEPING CITIZENS UNINFORMED.
Mayoral Candidates Debate Baltimore Property Taxes
January 5, 2016 5:24 PM By Alex DeMetrick
2BALTIMORE (WJZ) — It’s the chicken or egg question of this year’s race for mayor: lower property taxes to increase Baltimore’s population or increase the population to lower taxes? WJZ looked to some of the candidates for the answer.
Alex DeMetrick reports.
Property taxes fund police and fire, trash pickup and infrastructure, education from kindergarten to high school. It all makes lowering the property tax in Baltimore a challenge.
“It’s an absolute tough thing to do,” said State Senator Catherine Pugh.
According to state records, Anne Arundel County has a 2.3% property tax rate, Baltimore County is 2.75% and Baltimore City’s is 5.6%.
Mayoral candidate Nick Mosby says he’ll lower Baltimore’s rate.
“That percentage will be coming out. Again, we’re going to have a specific policy release on that percentage and exactly how we’re going to do it,” he said.
Pugh says she already has some specifics in mind.
“We begin to redevelop areas where we’ve had blight for a number of years that we can create a special property tax reduction area,” she said.
The kind of perk major developments have received.
“Why don’t we give everyone in the city a break?” said Councilman Carl Stokes.
Candidate Carl Stokes says across the board cuts in property taxes will bring more people to Baltimore and generate more money.
“That we make an even playing field for all developers, for all homeowners, for all property owners in the city of Baltimore,” Stokes said.
According to the website Real Estate Wonk, the average price for a house in Anne Arundel County is $375,000 with a tax bill of $3,700. It’s $302,000 in Baltimore County with taxes of $3,600. The average house price in the city is $171,000 with a tax bill of $4,000.
“It’s not an easy task and I’ve been there and chipped at it,” said Sheila Dixon.
Former mayor and candidate Sheila Dixon believes in investing in better schools and public safety.
“Then ultimately we’ll begin to retain citizens, increase people coming here to the city, people buying into the greatness we have here in the city,” Dixon said.
To make the city’s property tax rate competitive with surrounding counties, it would have to be reduced by half.
Nick Mosby, Stokes, Gutierrez, and others are shouting that they will lower those property taxes-----Stokes keeps using the figure of lowering them by 1/2======and none of this is true. Many of the new citizens have this tax issue at the top of the list---and they do not understand that in Baltimore---candidates are allowed to lie during primaries to get votes.
Even more ridiculous-----Mosby and Stokes voted for all this bond debt and corporate tax breaks and subsidy that is making taxes so high----all while saying they are going to lower taxes.
The citizens of Baltimore had for the most part no idea what voting for a bond issue for building public schools and other smaller venues would entail. Each time the city assigns bond debt it pledges future city revenue for decades to these projects which----we can all expect to grow in final cost. The City of Baltimore was declared by Rawlings-Blake and City Council just a few years ago----teetering near bankruptcy at the same time this $1billion and more bond debt was taken. Whereas this article makes clear our PIT------that is all personal income tax paid by citizens will service this debt for 30 years----the rest of this bond deal is written very vaguely for a reason-----'and minimum amounts from several city tax revenues'. Did you know this deal takes from a senior and veteran's funding for example?
The point is this----we never needed these bonds. Everyone agrees that rebuilding oversight and accountability in Baltimore will bring back easily a billion dollars each year to the budget----I feel quite a bit more all of which would have allowed the city to pay cash to rebuild all Baltimore public schools. They wanted to attach bond debt because that is how Wall Street manipulates deals to bring hundreds of millions of dollars in profits.
ANY CANDIDATE FOR MAYOR OF BALTIMORE THAT DOES NOT MAKE GETTING RID OF THIS BOND DEBT AND REWRITING THE TERMS OF ALL BOND AGREEMENTS TO PUBLIC INTEREST---WILL NOT SOLVE THE OVER-TAXATION OF CITIZENS IN BALTIMORE---TAXES WILL CONTINUE TO GROW TO FEED THESE BAD BOND DEALS.
'Sources for pledged deposits include fixed amounts from state lottery receipts and state school aid withheld by the state comptroller on behalf of BCPS, and minimum amounts from several city tax and city gaming-related revenues. The city pledged deposits are enhanced by a state intercept of city personal income tax (PIT) receipts in the event that city pledged deposits are insufficient. Certain state and city revenue sources from which pledged deposits are made are subject to annual appropriation'.
Fitch Rates Maryland Stadium Auth Baltimore School Bonds 'AA'; Outlook Stable
December 24, 2015 10:34 AM Eastern Standard Time
NEW YORK--(BUSINESS WIRE)--
Fitch Ratings has assigned a 'AA' rating to the following bonds of the Maryland Stadium Authority (MSA):
--$320,000,000 MSA Baltimore City Public Schools (BCPS) construction and revitalization program revenue bonds, series 2016A.
The bonds are scheduled to be sold via negotiated sale on or about January 15, 2016.
The Rating Outlook is Stable.
The bonds are limited obligations of the authority payable from pledged deposits to the financing fund derived from multiple revenue sources: state education aid subject to appropriation by the General Assembly, state lottery revenue, city beverage container tax and casino rental revenues subject to appropriation by the city, and certain other city gaming receipts. City pledged deposits are further backed by an intercept of city income tax receipts held by the state, if needed.
KEY RATING DRIVERS
AMPLE COVERAGE OF PLEDGED DEPOSITS: Under state statutory authorization, the bonds are secured by funds deposited into the BCPS construction financing fund (the financing fund) derived from multiple state of Maryland and city of Baltimore sources, with total pledged deposits sized to cover debt service on the maximum authorized borrowing. Coverage by individual revenue sources for specific pledged deposits is exceptional, providing ample cushion against underperformance. Sources for pledged deposits include fixed amounts from state lottery receipts and state school aid withheld by the state comptroller on behalf of BCPS, and minimum amounts from several city tax and city gaming-related revenues. The city pledged deposits are enhanced by a state intercept of city personal income tax (PIT) receipts in the event that city pledged deposits are insufficient. Certain state and city revenue sources from which pledged deposits are made are subject to annual appropriation.
CLOSE STATE OVERSIGHT: The borrowing benefits from careful oversight by the state of Maryland, whose GO bonds are rated 'AAA'; Stable Outlook. The bonds and sources of repayment are authorized in state legislation, and the state Board of Public Works (BPW) must approve issuance. The Maryland Stadium Authority (MSA) issues the bonds, pays the trustee from pledged deposits in the financing fund, and oversees construction. The state comptroller withholds state school aid and state lottery receipts for deposit to the financing fund and must withhold local PIT receipts held by the state in the event that city pledged deposits are insufficient.
BACKUP INTERCEPT OF CITY INCOME TAX: The rating is also supported by the ample level of interceptable city PIT receipts, a stronger pledge than the city tax and gaming sources intended to pay the bonds. PIT receipts are the second largest source of city general fund revenues. They benefit from the city's diverse though less wealthy economic profile. Fitch's assessment of the income tax intercept reflects the credit quality of the city of Baltimore.
LOTTERY REVENUES DISCRETIONARY: State lottery revenues net of administrative costs and prizes provide strong coverage of the fixed pledged deposit. Fitch views lottery sales over the long run as subject to discretionary consumer purchasing trends and sensitive to personal income, employment, demographic and competitive pressures.
STATE ROLE IN SCHOOL FUNDING: The state is the primary driver of education funding in Maryland and provides more than two-thirds of BCPS revenues. A constitutional education funding requirement and the state's expanded funding over the last decade underscore the state's commitment to school funding.
MAINTENANCE OF LOTTERY COVERAGE: Despite the strong coverage of state lottery pledged deposits, the discretionary nature of lottery activity likely limits the rating at the current level. Evidence of significant shifts in discretionary lottery activity that narrow coverage over time could affect the rating.
STRENGTH OF CITY INCOME TAX BACKUP: The rating is sensitive to erosion in the economic, revenue and budget performance of the city given the strong enhancement of city pledged deposits provided by city PIT receipts collected and subject to intercept by the state.
CONTINUED STATE EDUCATION FUNDING: Significant changes in the state's commitment to education funding that materially reduce the appropriations from which pledged deposits are drawn, or a change in the state's GO rating, could result in a rating change, although Fitch believes that such changes are unlikely.
The 'AA' rating on MSA's construction and revitalization program revenue bonds is based on Fitch's assessment of the credit quality of the varied revenue sources from which individual pledged deposits are made. The state of Maryland, whose GO bonds are rated 'AAA', is the source of most pledged deposits intended for debt service and the credit is further supported by the state's broader role in authorizing the bonds, overseeing their repayment, and implementing the program.
However, the rating is limited by both the credit quality of state lottery receipts, which Fitch views as a narrow and discretionary source of repayment despite the exceptional coverage it provides for state lottery pledged deposits, and by the credit quality of the city, whose PIT revenues are subject to state intercept in the event that city pledged deposits from intended beverage tax and certain gaming revenues are below the statutory thresholds. Fitch views the intercept of city PIT revenues as being a stronger repayment source than the underlying city pledged deposits and as linked to the broader credit quality of the city itself.
STATE AUTHORIZATION AND OVERSIGHT
The new bonds are authorized under 2013 state statutes providing for a maximum issuance of $1.1 billion to be supported by $60 million in annual pledged deposits from all sources. The current sale is the first of several planned to fund the repair or replacement of up to 28 Baltimore school facilities over 5 years.
The 2013 authorizing statutes established the bonds' multiple repayment sources and expanded the MSA's role to issuing the bonds, coordinating their repayment, and overseeing completion of the projects. Legislation established two funds under MSA oversight and held by the state treasurer: the BCPS financing fund receives pledged deposits from or on behalf of the state, BCPS and city, and the BCPS facilities fund holds other funds intended for construction and excess city pledged deposits, if any, including a reserve established at MSA's discretion, discussed in further detail below. Pledged deposits are in a closed loop, and the financing fund may not revert to the general or any special fund of the state.
Only deposits made to the financing fund are pledged to bondholders, although statutory uses of the facilities fund includes bond repayment. Annual pledged deposits from varying sources are statutorily phased in to reach a minimum of $60 million as of fiscal year 2017. A separate trust agreement establishes accounts held by the trustee, including the construction fund to which bond proceeds are deposited and the debt service fund which receives transfers by the MSA from the financing fund.
Fitch views the state's inherent credit strengths, reflected in its 'AAA' GO rating, as supporting the high credit quality of the new bonds. The bonds are integrated into the state's careful and centralized capital and debt management frameworks, despite not being considered state tax-supported debt, and are supported by allocations of statewide-revenue sources and appropriations of state education aid. The 2013 authorizing legislation required the MSA, BCPS, city, and the interagency committee on school construction, which oversees school capital projects, to conclude a memo of understanding (MOU) to carry out the program, subject to approval by the BPW (which consists of the governor, treasurer and comptroller). The 2013 legislation also requires annual reporting to the governor, BPW and legislature on program progress. As with state GO and other tax-supported issues, borrowing under the current authorization must be approved by the BPW.
PLEDGED DEPOSITS FROM STATE LOTTERY
Pledged deposits include a fixed $20 million amount from state lottery sales receipts, net of administrative costs and prize winnings, and subordinate to a fixed $20 million senior payment for MSA facilities and a small variable annual deposit intended for a state veterans' trust fund. The state lottery pledged deposits made by the comptroller are statutorily required on an annual basis beginning in fiscal 2016, with at least $10 million due by December 1 and the remainder due by fiscal year end; no appropriation is required. Lottery receipts after the pledged deposit are transferred to the state general fund.
Lottery sales provide ample coverage of pledged deposits despite the required payments senior to pledged deposits. In fiscal 2015, an estimated $525.9 million in lottery receipts net of prizes and administrative costs covered senior required payments and the pledged deposit for the current bonds by 13.2x.
The strong projected coverage by net lottery receipts compares favorably to other lottery-backed debt rated by Fitch and supports the rating at the 'AA' level. However, Fitch views lottery revenues to be an inherently less certain source of bond repayment than broader tax revenues, given the discretionary nature of consumers' lottery purchases and their exposure to cyclical, structural and administrative factors; these considerations limit the rating at the current level.
EDUCATION AID SUPPORTING THE BONDS
Education aid appropriated by the state and allocated to BCPS is intended to be the source of $30 million in pledged deposits on an ongoing basis, beginning in fiscal 2017. Under the bonds' authorization, the bonds are supported by two separate, fixed school aid amounts, one derived from unrestricted aid and the other derived from additional state aid resulting from a temporary school retiree health cost transfer from the city of Baltimore.
The bonds' authorizing statute requires the deposit of $10 million in fiscal year 2016 and $20 million annually thereafter from unrestricted state education aid. These amounts are withheld on a bimonthly basis by the comptroller and deposited on behalf of BCPS in the financing fund. Fiscal 2015 unrestricted aid allocated to BCPS totaled $907 million and covered the $20 million pledged deposit required beginning in fiscal 2017 by 45.4x.
Additionally, $10 million annually in additional school aid received by BCPS is withheld by the comptroller on a bimonthly basis and deposited to the financing fund. The additional school aid is generated from a separate transfer to BCPS by the city of funds which allow BCPS to maximize state maintenance of effort formula aid. The transferred city funds are intended for health costs of school retirees borne by the city; the transfer is ultimately returned to the city, which remains responsible for these costs. The $70.3 million in fiscal 2015 additional state aid covers the $10 million pledged deposit by 7x.
Subsequent legislative action allowed the $20 million in authorized fiscal 2016 deposits from both unrestricted and additional state aid sources to flow instead to BCPS given school budget needs and the absence of borrowing under the program to date.
EXTENSIVE STATE ROLE IN EDUCATION
Virtually all BCPS operating revenues derive from state, city and federal transfers, with more than three-fourths of general fund receipts consisting of state aid. As of fiscal 2014, 77% of general fund revenues consisted of state education aid with a further 21% from city sources. State statute caps BCPS debt at $200 million, excluding federally-qualified school construction bonds and lease revenue bonds, and as with school aid pledged deposits for the current bonds, debt service on BCPS-issued debt is withheld by the comptroller from appropriated state education aid. The school board overseeing BCPS consists of nine members appointed by the governor and mayor.
Although BCPS is a legally separate component unit of the city, Fitch views credit risks originating from BCPS as limited given the state's primary role in setting statewide education policy, funding school operating and capital needs, and overseeing school governance.
The state's role in funding education is mandated by Maryland's constitution. Statutory formula provisions governing aid incorporate numerous factors including pupil counts and community wealth and are subject to legislative changes. However, protections of appropriated state aid are extensive and include a requirement that the governor seek appropriation of the amount requested by the state school superintendent and limits on reducing appropriated aid or using it for non-education purposes.
Maryland expanded statewide school aid significantly in the decade prior to the downturn, with small increases continuing since then. The state reports that the average increase in state aid for public schools rose 10.3% annually between fiscal years 2002-2008, a period during which the state was implementing far reaching changes in school funding. Despite the downturn and slow economic and revenue recovery thereafter, state school aid declined only slightly in fiscal year 2010 and has increased an average of 1.9% annually between fiscal years 2008-2016.
INTENDED CITY PLEDGED DEPOSITS
Unlike the fixed pledged deposits of state lottery and school aid, pledged deposits by the city are intended to achieve a minimum threshold each fiscal year and are additionally enhanced by a backup state intercept of city PIT receipts, which Fitch views as a stronger source of credit quality than the intended pledged deposits. The city's minimum pledged deposits must total $8 million in fiscal years 2015 and 2016 (fiscal year-end June 30), and $10 million annually from fiscal 2017 through final maturity; half of the deposits are required by November 1 in each fiscal year, with the other half by May 1.
The intended source of city pledged deposits include beverage container taxes and certain gaming-related receipts. Receipts from beverage container taxes, levied at $0.05 per container on distributors of most bottled beverages, are required to be deposited to the financing fund in their entirety, subject to appropriation by the City Council. The tax generated nearly $10.4 million in fiscal 2015. The current rate has been in effect since fiscal 2014, and the tax was first enacted in fiscal 2010.
In addition, city pledged deposits include two gaming sources from the city's Horseshoe Casino, a privately-owned and operated casino that opened under state authorization in August 2014. Pledged deposits include 10% of the participation rent from the casino, subject to city appropriation, and half of the 5% of the casino's table games proceeds that is statutorily allocated to the city, but not subject to appropriation.
The casino operator is required to pay rent under a ground lease based on the greater of a fixed dollar amount or a percentage of gross gaming proceeds; 10% of this would be intended as a pledged deposit, or approximately $856,000 in the lease year ending Sept. 30, 2015. The allocated percentage of table games is payable only upon completion of Maryland's sixth and final casino, currently under construction near Washington, DC. Scheduled completion is in 2016.
Fitch views the short operating histories of the city's intended sources of pledged deposits as being inherent credit weaknesses. Moreover, the two gaming sources are exposed to a range of sector- and site-specific risks, including competitive pressures from expanded gaming in the mid-Atlantic region and the fact that revenues are generated at a single operating site in the city.
CITY PIT PROVIDES ENHANCEMENT
The intercept of city PIT receipts is an inherently stronger source of credit quality than the intended sources of city pledged deposits, in Fitch's view. Although collected and held by the state, Fitch's understanding is that city PIT receipts could be subject to interruption in the unlikely event that the state authorizes, and the city files for, bankruptcy. Consequently, Fitch views the credit quality of the intercept as being limited by the credit quality of the city itself.
All Maryland counties levy a PIT on the state's taxable income base at a rate determined by the county or the city of Baltimore up to a statutory cap of 3.2%. The city's PIT is levied at the cap, collected by the state comptroller, and remitted to the city on a quarterly basis, with some lag to account for refunds.
PIT trends generally track the broader economic cyclicality of the region and state. Baltimore's PIT receipts have grown an average of 3.9% annually since fiscal 2002; this incorporates a single rate increase in fiscal 2011, to 3.2% from 3.05%. PIT receipts are the city's second-largest source of tax revenue following property taxes; receipts totaled $284 million in fiscal 2014, providing potential coverage of the ongoing $10 million minimum city pledged deposit by 28.4x.
Timing provisions for the intercept are adequate and coverage of the $10 million pledged deposit would be substantial. The bonds' authorizing legislation specifies that, in the event city pledged deposits are inadequate as of each November 1 or May 1 deposit date and any reserve amounts held in the facilities fund are insufficient, the MSA must notify the comptroller, who withholds city PIT receipts in the state's custody and deposits them to the financing fund by the following December 15 or June 15. The MSA transfers funds from the financing fund to the trustee for debt service on the following April 5 and October 5, for debt service on May 1 and November 1.
RESERVE NOT PLEDGED TO BONDHOLDERS
In the event of insufficient city pledged deposits, the bond authorization requires that funds held in the reserve held in the facilities fund, if established by the MSA, be depleted first, before triggering the city PIT intercept noted above.
The reserve is established at the MSA's discretion within the facilities fund. In the event that city pledged deposits to the financing fund exceed the minimum thresholds, the MSA is authorized to transfer excess city pledged deposits to the facilities fund and retain up to $2.5 million annually in the reserve. A cumulative maximum of $20 million may be retained. These amounts may be increased by agreement of parties to the MOU.
Funds in the facilities fund, including excess city pledged deposits in the reserve, are not pledged to bondholders, and thus Fitch does not view the reserve account as providing additional bondholder protection.
For more information on the State of Maryland, please see Fitch's rating action commentary 'Fitch Rates $500MM Maryland GOs 'AAA'; Outlook Stable,' dated July 7, 2015 and available at www.fitch ratings.com.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
I attended a housing justice seminar at the U of M ----where we listened to Harvard/Wall Street sell what will be the next big capture of Baltimore City revenue for decades if allowed to be installed----and it is all for corporate housing for workers, being sold as housing justice for low-income Baltimore citizens and JOBS, JOBS, JOBS for building. It is all a scam but what is far worse is yet more municipal bond debt to the tune of another $1 billion coming to build all that corporate housing.
Financial researchers have known from 2009 that Obama, Congress, and the FED installed policy deliberately to super-heat the US Treasury and municipal bond market------policy making it attractive to create all that Federal, state, and local debt. They did so knowing it would make the bond market crash and hard taking our economy with it---and leaving all levels of government with massive debt----as in Baltimore. A person on this panel at a University for goodness sake was allowed to shout at me----THE MUNI-MARKET IS NOT GOING TO COLLAPSE. Hello----everyone knows the muni-market is going to collapse.
This is the point-----candidates for Mayor of Baltimore are mostly the same pols that exposed the city to all this debt----knowing they would bring Baltimore to such a level of debt we will likely default on bonds in this coming economic crash----or, they will make all Baltimore citizens sell a kidney on the black market as revenue for the city. Still shouting to use the same Wall Street debt in development----still shouting that they are going to bring tax rates down in Baltimore----ready to float yet another bond deal in this coming election to install corporate housing for workers.
'For some months now, the municipal bond market has been in turmoil over the possibility that multiple issuers could default on their obligations. Much like how the mortgage-backed bond market cracked and then shattered, spreading chaos throughout the credit markets, the worst-case fear is that there could be a cascade of defaults throughout the country. These defaults would not only be serious for those who depend upon municipal bonds to fund some portion of their retirement needs, but also for the states and state-sponsored agencies that depend upon the muni market for capital. (For a little background and history of this market, check out Fatal Seduction Of The Municipal Bond Insurers.)
Moreover, just as the collapse of the mortgage-backed bond market spread far beyond the debt markets and into the stock markets and economy at large, so too is the fear that a wave of muni defaults will rattle the economy and stocks once again. With all of the worry and anxiety, then, investors have been selling out of these bonds, pushing yields to two-year highs'.
Now, you will hear nothing about this in Baltimore's Mayoral Forums----nothing in the news on policy issues------and yet it is the GORILLA in the room as regards all government revenue and stability of local economies. A Mayor of Baltimore would immediately challenge the legitimacy of all this bond debt------the fact that none of it has any public interest built into this debt----and stop the move towards bankruptcy that global pols plan to use as the excuse to hand all that is public to global corporations. Think about policies being written that encourage more city debt----all I hear from Mosby, Stokes, Dixon, Pugh----is more leverage----more partnerships with developers----the same stances that created the mound of debt in Baltimore and the long-term stagnant economy. To end my talk on Social Security Trust------this US Treasury and municipal bond market collapse is aimed right at all retirement savings----from pensions and 401Ks----to our Social Security Trust all part of the US Treasury and the trillions of dollars in bond debt.
THEY THINK THEY ARE IMPLODING OUR PERSONAL WEALTH AND RETIREMENT SYSTEMS-----AND WE NEED TO SAY----WHAT A CRIME!
The Approaching Muni Bond Collapse
03/18/2010 05:12 am ET | Updated May 25, 2011
- Garrett Johnson Freelance writer
"I believe that the states across the United States will face deficits a year after stimulus ends of $300 billion to $500 billion a year," Ravitch told about 200 people gathered at New York University's Robert F. Wagner Graduate School of Public Service. "You're going to begin to see cracks in the municipal bond market well before then, because that's an inexorable casualty of unfundable state deficits."
To put this into perspective, the total state budgets for 2010 was about $1.4 Trillion. If his predictions are anywhere close to being true then the budget problems of the states are essentially unfixable. "These are numbers that are unprecedented," Ravitch said, adding that the current recession is unlike any in the nation's history, with unemployment continuing to rise, "banks are falling like autumn leaves, and nobody is projecting any significant growth in 2010."
The condition of state and local budgets are in their worst shape since the Great Depression, and if the economy doesn't turn around quicker than the mainstream believes, we are going to see defaults that will shake the economy to its foundation. The states are suffering "unbelievable" revenue shortages that are blowing out all previous budget estimates. Only four months into the 2010 fiscal year, 26 states already have deficit problems totaling $16 Billion. This is after the states had to close $178 Billion of budget gaps this past summer. Only 22 states had budgets deficits of less than 20% of their total budgets. At least 9 states are projecting deficits for 2011 of at least 20%, and those are often optimistic projections.
All the easy cuts have been made. Any new cuts will mean sawing into bone.
The states have mostly closed the budget gaps through borrowing, and for now the market has responded well with strong demand. However, lately the sheer volume of supply in the three trillion dollar market is starting to drive up yields.
State and local government bonds have dropped almost 2 percent since Sept. 30, based on Merrill Lynch & Co.'s Municipal Master Index, which lost a record 5.1 percent in September 2008. At least four states -- Washington, Hawaii, Maryland and Minnesota -- have postponed or scaled back refinancing plans this month as benchmark borrowing costs rose the most since January as measured by the weekly Bond Buyer 20 index.
It used to be that the state and local governments didn't have to worry too much about yields. Just a few years ago they sold through the monolines. These insurance companies would back the municipal bonds with their AAA ratings for a small fee. The monolines got their cut. The local governments sold their debt at low interest rates. Everyone was happy. So what happened? The monolines got greedy. They weren't satisfied with their steady profits from the current business model. They wanted a piece of the sub-prime action. They started backing sub-prime mortgage-backed securities. When the mortgages blew up, the monolines were forced to pay out larger and larger amounts on those losses. Eventually the monolines lost their AAA ratings, and now they no longer have a sustainable business model.
Since the insured municipal bond model has blown up the muni bond market has gotten much more volatile. In February the muni auction-rate bond market completely collapsed. This happened less than a month after monoline insurer Ambac was downgraded, along with all the bonds it insured.
From 1984 through 2006, only 13 auctions failed, typically because of changes in the credit of the borrower, according to Moody's Investors Service. There were 31 failures in the second half of 2007, and 32 during a two-week period beginning in January. That compares with more than 480 failures yesterday alone, according to figures compiled by Deutsche Bank AG, Wilmington Trust Corp. and Bank of New York Mellon Corp.
Economist and author Frederick J. Sheehan recently wrote an article about the municipal bond market, and he didn't mince words.
The municipal market will probably repeat the pattern of the sub-prime collapse.
Some reasons for municipal collapse:
First, losses on investments will require much higher pension contributions. Estimates vary but some states and towns will need to increase their contribution by 50% or even 100% start ing in 2010 or 2011.
Second, spending has exploded. In New York City, the average compensation for full-time worker rose from $65,401 in 2000 to $106,743 - a 63% increase...
Third, accounting gimmicks are near an end. To meet booming expenses, many municipalities have engaged in questionable practices, such as selling property to meet current expenses...
Fourth, disclosure to municipal bondholders has been poor. Financial disclosure for municipal financing is not well enforced...
Even during the relatively good bubble years of pre-2007 the states and local governments spent more than they took in with taxes.
Most people assume that muni bonds are safe from default. That's not true. Between 1970 and 2000 there were only 18 defaults on rated muni bonds. For instance, Cleveland in 1978 and New York a few years earlier. However, there were over 1,300 defaults on un-rated muni bonds during the same period.
Since the Great Depression is the comparison here, let's look at an example.
In 1933, the Iowa Supreme Court ruled the City of Dubuque was
required to meet its bond commitments. Kevin A. Kordana, a University of Virginia Law School professor, has written: "[T]axpayers promptly replaced the Iowa Supreme Court justices with 'judges already committed to their anti-bond- holder viewpoint.'"24 A tangle in the federal courts followed which would require more explanation than it is worth, but a headline from the New York Times probably says all one needs to know about human tendencies in time of woe: "Iowa Farmers Abduct Judge From Court; Beat Him and Put Rope Around His Neck."
In 1935 there were at least 3,252 municipal issues in default. It's worth noting that the bottom of the Great Depression was in 1933.